Donald Trump, COVID-19 and geopolitics make strategic thinking less difficult than in the past. What we need to do in the Islamic finance sector is clear within these dynamic parameters.
Trump’s impact on the US and its alliances means that the world has become the most multipolar that it has been since 1914. If you have any doubts, remember that during the early phases of COVID-19, the US commandeered personal protective equipment (PPE) destined for France, a NATO ally and OECD partner. The PPE was in Thailand. The implication is clear: in case of disaster, the smaller the country, the poorer the people, the more alone you are. This means that domestic human capital, local supply chains and domestic healthcare capacity should be national priorities. A world in which we are alone is a de-globalizing world. Free trade agreements and market access will have less meaning. Emerging market countries must think in regional terms and have local free trade, but tariffs to protect key regional industries including the local production of PPE and other crucial supplies.
Between climate change, industrial and agricultural sprawl, and the remnants of globalization, we can worry that events like COVID-19 are expected to repeat. The implications fall into two zones: health, water and sanitation infrastructure, and agriculture. The former requires human capital and physical infrastructure. If one examines the development of the US, the canals, roads and railroads were followed by education, health, water and sanitation investments. A more recent success story is Dubai. Forty years ago, the Jebel Ali Free Zone and port was built, then the airport was Improved and the remaining high-quality infrastructure followed. The lesson is clear for emerging markets: transportation and logistics open opportunities.
Agriculture in the rich countries of the west and China is over-industrialized and quite possibly a major contributor to climate change. Regenerative soil policies and small holder-friendly methods may result in more stable production as well as stabilizing the natural hydro cycle. Unlike industrialized agriculture, regenerative agriculture costs less over time. This is a warning to be wary of their ‘success’ and educate ourselves to make our own improvements.
Geopolitics brings three-and-one-half poles into contention: Russia, the People’s Republic of China and the US. The EU is the half, unless it chooses not to be. There was a reason for the non-aligned movement during the previous Cold War. South–South trade and regional co-dependence can help to push back the zero-sum alliance and commercial propositions of the great powers. Each great power needs some group of benefits from the non-aligned countries and regional groupings. Yet, to some degree, what the three-and-one-half poles are, to a certain extent, substitutes for one another. Their needs do not have to be elephant feet squashing everyone else’s aspirations and independence.
Islamic financial institutions and supporting regulators need to consider the policies that provide for Islamic financial institution funding for local and regional infrastructure. There are good examples within the wider Islamic financing space of applied Islamic finance for roads (Malaysia and Turkey), airports (Saudi Arabia), water (Malaysia) and energy (Malaysia, Pakistan, Egypt, and Saudi Arabia). In Malaysia, infrastructure deals are financed in the capital markets via Sukuk. In Saudi Arabia and Turkey, syndicated deals are more common. And in Turkey, Egypt and Pakistan, multilateral development banks, including the IsDB and the European Bank for Reconstruction and Development, support syndications.
What are the implications for Islamic finance? Individual players can only do so much. But, think of the Quran’s example, the rain starts with a single drop. (Al Kahf reference). Often, the players are too weak or poorly connected; this creates opportunities for the IsDB Group, APICORP and other multilateral to help. In so many countries from West Africa to Central Asia, IsDB teams from the International Islamic Trade Finance Corporation and the Islamic Corporation for the Development of the Private Sector are doing micro-level engagements with local financial institutions. These are those very first drops of rain.
But the multilateral organizations work best when there is a domestic policy and a plan. Policy, policy and policy are the keys to success. Look at Malaysia’s development of Islamic finance over the past 40 years: policy and planning and good guidance for the private sector. Contemplate the revolution in Saudi Arabia these past few years. First came Vision 2030 (remember in the 1980s Malaysia had Vision 2020). Now, the Kingdom is comprehensively overhauling its policies and plans to modernize the economy and create domestic opportunities.
Good planning has allowed many countries to facilitate private sector development in key industries. From education to health and water, collaboration between the private sector, Islamic financial institutions and public policymakers can allow the emergence of local centers of excellence. Tax policies, public grants or subsidies relating to properties, even commitments to pay, can all assure that the opportunities are viable and increase the common wellbeing of local and regional residents. Islamic financial institution-financed projects contribute to jobs, create new customers for Islamic finance institutions, and may even help to reverse migration to mega cities.
Within this, the role for individuals in Islamic financial institutions is clear. They must contribute to good public policy. Then they must, deal by deal, invest where the long-term opportunities are ready to be percolated.
And finally, as we consider infrastructure, education, and health, our mantra should change from “build it so that they will come” to “build it so that we can achieve” with or without the big powers.